Accounting for Lease Liability in ratio analysis


there is a line in the notes that says,

“When calculating solvency ratios, analysts should estimate the present value of operating lease obligations and add it to the firm’s liabilities.”

say we use the current ratio TD/TA – why wouldnt include the ROU asset in TA and, as the notes say, only include the lease liability?

many thanks!

Yes, in order to do that correctly you should add right of use assets to total assets. You should also adjust the income statement if you are treating operating lease liabilities as debt. For example, you should also move some of the lease expense out of operating expenses and into interest expense otherwise the Debt to EBITDA ratios would be incorrect.

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thank you for your help

no there is no ROU asset when we talk about operating lease under the lessee perspective… SO you cannot add it…

There are ROU assets associated with operating lease liabilities on the balance sheet. If not, the balance sheet would not balance.

No the ROU is for finance lease. And you dont need to have an asset to balance your liabilities this does not make sense (otherwise you would have 0 equity everytime). The corresponding impact of the decrease of your liability over time would be an expense that’s it.

@Simon_Nouvellon What are right of use assets from then since assets associated with capitalized leases are included the PP&E section of the balance sheet?

I think there is a misunderstanding between finance lease and operating lease. Finance lease you do depreciate the asset (ROU) but the question here is about operating (ie less than 0 year, hence no asset reported, and no depreciation expense). regarding opearting lease, the lessor keeps it on its balance sheet though and he is the one depreciating it. I am talking about IFRS btw.